Older, but not always wiser

People become worse at making financial decisions as they grow older, a financial literacy expert has said.

"The ability of people to make sound financial decisions in their own best interests peaks at age 53 and declines thereafter at a pretty rapid pace," noted Professor Lewis Mandell, an emeritus professor of finance at the University at Buffalo (State University of New York) in the United States.

Prof Mandell was in town to give a lecture on creativity and entrepreneurship at SIM last Wednesday.

He is also a professor of economics for managers in the SIM-University at Buffalo Executive MBA programme, and has written a book, What To Do When I Get Stupid, to be launched later this year.

He told The Sunday Times in an interview at SIM: "By the time the person is 70, it (this ability) really declines very rapidly."

The ability to make financial decisions comes from two components: analytical ability and knowledge gained through experience.

Analytical ability peaks at the age of 20 and then "goes downhill at about 1 per cent a year for the rest of one's life", Prof Mandell said.

And even though people gain more experience as they grow older, the bulk of that knowledge has already been obtained by the age of 40 or 50, he added.

Past that point, the decline in analytical ability outweighs the gain in experience.

What's worse, Prof Mandell said, is that some studies have found that older people tend to believe that they have become better at making financial decisions as they age.

This leaves older people more vulnerable to swindlers. "When we're vulnerable, some younger person who talks well and who seems to have all the answers can very easily take all our money away," he warned.

It is an issue close to his heart, as he turns 70 next February. Some of his elderly friends have been tricked by people claiming they could help them manage their money, he recounted.

To defend themselves and their nest eggs, people need to be aware that their decision-making ability will decline as they approach the age of 70, he said.

"It's very important that people get their lives set up while they still have it together, and put things on automatic so they can be sure they have enough income to make it through life comfortably."

Q: Does it mean that I should wait until 53 to make major financial decisions?

From 40 to 53, your financial decision-making ability goes up at a very, very slow rate. So I'm not saying that if you're 40, you want to wait until age 53. That's just an average. If you're 40, you probably don't have an awful lot of financial assets to make decisions with, in any event.

Q: Should I just stop making financial decisions after I turn 70?

As long as you've retained assets, you have to keep making financial decisions.

Is it a good idea to make it possible to make as few financial decisions as possible after the age of 70? I would say yes, absolutely. You want to have as much in place before you get to an older age.

Q: But what about investors like Mr Warren Buffett who are in their 80s?

One reason why Warren Buffett is so sharp, aside from being a very smart person, is this work of investing he's been doing every day of his life since he was probably 23 years old.

But most people do not want to, or have not spent their whole life dealing with investments and do not deal with it every single day of the week.

If I went to a financial planner or adviser or broker and said I want to put my money into an immediate annuity, they wouldn't do it because, in many cases, their profit comes from managing my money.

These are things that people are not going to learn on their own because virtually no one has the incentive to tell them the truth.

Q: What about the CPF that I already have, is that the same?

It's similar... I would feel much better if people put their money in their CPF so that they're much less vulnerable because nobody regards them as a good target. I'm far better off topping up my CPF and not having so much available as a lump sum of money, and then people aren't going to be going after me for that money.